I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

F 

Preparing basic financial statements 

 

 

 

3 Disclosure 

notes 

 

 

 

(b)  Draft the following disclosure notes: 

(iv) Inventory 

S 

 

 

 

 

 

 

1

   Cost of goods sold 

The cost of goods sold is calculated as: 

Opening inventory + purchases – closing inventory.  

1.1 Unsold goods in inventory at the end of an accounting period 

Goods might be unsold at the end of an accounting period and so still be held in inventory. The 

purchase cost of these goods should therefore not be included in the cost of sales of the period. 

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CHAPTER 7  

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  INVENTORY 

 

109 

1.2 The cost of goods sold 

The cost of goods sold is found by applying the following formula. 

FORMULA TO LEARN 

 

$ 

Opening inventory value 

 X 

Add cost of purchases (or, in the case of a manufacturing company, the 

cost of production) 

 

 X  

 

 X 

Less closing inventory value 

 

(X) 

Cost of goods sold 

 

 X  

 

In other words, to match 'sales' and the 'cost of goods sold', it is necessary to adjust the cost of goods 

manufactured or purchased to allow for increases or reduction in inventory levels during the period. 

The 'formula' above is based on a logical idea. You should learn it, because it is a fundamental principle 

of accounting. 

1.3 Example: cost of goods sold 

Perry P Louis, trading as the Umbrella Shop, ends his financial year on 30 September each year. On  

1 October 20X4 he had no goods in inventory. During the year to 30 September 20X5, he purchased 

30,000 umbrellas costing $60,000 from umbrella wholesalers and suppliers. He resold the umbrellas 

for $5 each, and sales for the year amounted to $100,000 (20,000 umbrellas). At 30 September there 

were 10,000 unsold umbrellas left in inventory, valued at $2 each. 

Required 

What was Perry P Louis's gross profit for the year? 

Solution

 

Perry P Louis purchased 30,000 umbrellas, but only sold 20,000. Purchase costs of $60,000 and 

sales of $100,000 do not represent the same quantity of goods. 

The gross profit for the year should be calculated by 'matching' the sales value of the 20,000 umbrellas 

sold with the cost of those 20,000 umbrellas. The cost of sales in this example is therefore the cost of 

purchases minus the cost of goods in inventory at the year end. 

 

 $      

 $     

Sales (20,000 units) 

 

100,000

Purchases (30,000 units) 

 60,000 

Less closing inventory (10,000 units @ $2) 

 20,000 

Cost of sales (20,000 units)  

 

 40,000

Gross profit 

 

 60,000

1.4 Example continued 

We shall continue the example of the Umbrella Shop into its next accounting year, 1 October 20X5 to 

30 September 20X6. During the course of this year, Perry P Louis purchased 40,000 umbrellas at a 

total cost of $95,000. During the year he sold 45,000 umbrellas for $230,000. At 30 September 20X6 

he had 5,000 umbrellas left in inventory, which had cost $12,000. 

Required 

What was his gross profit for the year? 

Solution

 

In this accounting year, he purchased 40,000 umbrellas to add to the 10,000 he already had in 

inventory at the start of the year. He sold 45,000, leaving 5,000 umbrellas in inventory at the year end. 

Once again, gross profit should be calculated by matching the value of 45,000 units of sales with the 

cost of those 45,000 units. 

The cost of sales is the value of the 10,000 umbrellas in inventory at the beginning of the year, plus the cost 

of the 40,000 umbrellas purchased, less the value of the 5,000 umbrellas in inventory at the year end. 

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